A.R.S. tit. 20 ch. 16 — Arizona Revised Statutes Title 20 Chapter 16 — Variable Life Products

20-2601. Definitions In this chapter, unless the context otherwise requires: 1. "Affiliate" means a person who directly or indirectly controls, is controlled by or is under common control with an insurer, a person who for a specific fee or commission regularly furnishes investment advice to an insurer with respect to the insurer's separate accounts or a director, officer, partner or employee or a member of the immediate family of a director, officer, partner or employee of an insurer, controlling or controlled person or person providing investment advice. 2. "Assumed investment rate" means the rate of investment return that is required to be credited to a variable life insurance policy, after the deduction of charges for taxes, investment expenses and mortality and expense guarantees, to maintain the variable death benefit in an amount that is equal at all times to the amount of the death benefit, other than incidental insurance benefits, that would be payable under the plan of insurance if the death benefit did not vary according to the investment experience of the separate account. 3. "Benefit base" means the amount to which the net investment return is applied. 4. "Control" or "controlling" has the same meaning prescribed in section 20-481 and includes the terms "controlled by" and "under common control with". 5. "Flexible premium policy" means a variable life insurance policy other than a scheduled premium policy. 6. "General account" means all of the assets of an insurer other than assets in separate accounts established pursuant to section 20-651 or the insurance laws of the insurer's state of domicile if the insurer is a foreign or alien insurer. 7. "Incidental insurance benefit" means all of the insurance benefits in a variable life insurance policy except the variable death benefit and the minimum death benefit. Incidental insurance benefit includes accidental death and dismemberment benefits, disability benefits, guaranteed insurability options, family income or term riders. 8. "Insurance producer" means any person, corporation, partnership, or other legal entity that is licensed by this state as a life insurance producer. 9. "Minimum death benefit" means the amount of the guaranteed death benefit, except incidental insurance benefits, that is payable under a variable life insurance policy regardless of the investment performance of the separate account. 10. "Net investment return" means the rate of investment return in a separate account that is applied to the benefit base. 11. "Policy processing day" means the day on which the charges that are authorized in a policy are deducted from the policy's cash value. 12. "Scheduled premium policy" means a variable life insurance policy under which both the amount and timing of premium payments are fixed by the insurer. 13. "Separate account" means a separate account established pursuant to section 20-651 or the insurance laws of the insurer's state of domicile if the insurer is a foreign or alien insurer. 14. "Variable death benefit" means the amount of the death benefit, except incidental insurance benefits, that is payable under a variable life insurance policy, that is dependent on the investment performance of the separate account and that the insurer must pay in the absence of any minimum death benefit. 15. "Variable life insurance policy" means an individual policy that provides for life insurance, the amount or duration of which varies according to the investment experience of any separate account or accounts that are established and maintained by the insurer pursuant to section 20-651 or the insurance laws of the insurer's state of domicile if the insurer is a foreign or alien insurer. 20-2602. Requirements applicable to insurers issuing variable life insurance A. An insurer shall not deliver or issue for delivery in this state a variable life insurance policy unless all of the following apply: 1. The insurer is licensed to transact life insurance business in this state. 2. The director gives written approval to the insurer for the issuance of variable life insurance policies in this state. The director shall grant the written approval only after finding that: (a) The plan of operation for the issuance of variable life insurance policies is not unsound. (b) The general character, reputation and experience of the management and those persons or firms that the insurer proposes to supply consulting, investment, administrative or custodial services to the insurer will reasonably result in the competent operation of the variable life insurance business of the insurer in this state. (c) The financial condition of the insurer and its method of operation in connection with the issuance of variable life policies is not likely to harm the public or its policyholders in this state. The director shall consider at least the following: (i) The insurer's history of operation and financial condition. (ii) The qualifications, fitness, character, responsibility, reputation and experience of the officers, directors and other management personnel of the insurer and of those persons or firms that the insurer proposes to supply consulting, investment, administrative or custodial services to the insurer. (iii) The applicable law under which the insurer is authorized in its state of domicile to issue variable life insurance policies. The state of entry of an alien insurer is deemed to be its state of domicile. (iv) If the insurer is a subsidiary of or is affiliated by common management or ownership with another company, the insurer's relationship to the other company and the degree to which the requesting insurer and the other company meet these standards. B. Before delivering or issuing for delivery in this state a variable life insurance policy, an insurer shall file the following information with the director: 1. Copies and a general description of the variable life insurance policies the insurer intends to issue. 2. A general description of the insurer's methods of operation of the variable life insurance business, including the methods of policy distribution and the names of those persons or firms that the insurer proposes to supply consulting, investment, administrative, custodial or distribution services to the insurer. 3. With respect to a separate account that the insurer maintains for any variable life insurance policy, a statement of the investment policy that the issuer intends to follow for the investment of the assets that are held in the separate account and a statement of the procedures for changing the investment policy. The statement of investment policy shall include a description of the investment objectives that are intended for the separate account. 4. A description of any contemplated investment advisory services that satisfies section 20-2606, subsection L. 5. A copy of the statutes and rules of the insurer's state of domicile under which the insurer is authorized to issue variable life insurance policies, unless the insurer is domiciled in this state. 6. A completed national association of insurance commissioners' uniform biographical data form for the officers and directors of the insurer. 7. A statement that is completed by the insurer's actuary and that describes the mortality and expense risks that the insurer will bear under the policy. 8. A statement that describes the method of computation of cash values and other nonforfeiture benefits if not described in the policy. C. Each insurer that seeks to enter into the variable life insurance business in this state shall establish and maintain a written statement and shall specify in the statement the standards of suitability the insurer will use. The standards of suitability shall specify the following: 1. That an insurer shall not make a recommendation to an applicant to purchase a variable life insurance policy. 2. That a variable life insurance policy shall not be issued if after the insurance producer making the recommendation or the insurer considers the applicant's insurance and investment objectives, financial situation and needs and any other information known to the insurer or the insurance producer, the insurer or insurance producer determines that the purchase of the policy is unsuitable for the applicant. D. An insurer authorized to transact variable life insurance business in this state shall not use any sales material, advertising material, descriptive literature or other material of any kind in connection with its variable life insurance business in this state that is false, misleading, deceptive or inaccurate. Variable life insurance sales material, advertising material and descriptive literature are subject to section 20-1110, subsection E. E. A material contract that is entered into between an insurer and a supplier of consulting, investment, administrative, sales, marketing, custodial or other services with respect to variable life insurance operations shall be in writing and shall state that on the director's request the supplier of the services shall furnish to the director any information or reports in connection with the services that would allow the director to determine if the variable life insurance operations of the insurer are being conducted in a manner that is consistent with this article. 20-2603. Reports A. In addition to any other materials an insurer is required to submit to the director pursuant to this article, an insurer authorized to transact variable life insurance business in this state shall submit the following to the director: 1. An annual statement of the business of its separate account or accounts in a form that the national association of insurance commissioners prescribes. 2. Before its use in this state, any information that the insurer furnishes to applicants pursuant to section 20-2607. 3. Before its use in this state, the form of the reports to policyholders that are prescribed by section 20-2609. 4. Any additional information concerning the insurer's variable life insurance operations or separate accounts as the director deems necessary. B. The director shall disapprove any material that is submitted under this section that the director finds to be false, misleading, deceptive or inaccurate in any material respect. If the material was previously distributed, the director shall require that the insurer distribute amended material. C. The director may disapprove any material that is filed with the director if at any time the director finds that the material does not comply with the standards established pursuant to the laws of this state. 20-2604. Variable life insurance policy and filing requirements A. Except pursuant to chapter 5, article 1 of this title, the director shall not approve a variable life insurance form unless the insurer files with the director its variable life insurance policies, and all riders, endorsements, applications and other documents that are attached to the policy and that relate to the variable nature of the policy, and the director approves each policy before the policy is delivered or issued for delivery in this state. For the purposes of this subsection the procedures and requirements for the filing and approval of variable life insurance policies shall be the same as the filing and approval procedures that apply to other life insurance policies, to the extent those procedures are not inconsistent with this article. B. A variable life insurance policy that is delivered or issued for delivery in this state shall comply with the following minimum requirements: 1. The insurer shall bear mortality and expense risks. The mortality and expense charges are subject to the maximums stated in the policy. 2. For scheduled premium policies, the insurer shall provide a minimum death benefit in an amount that equals or exceeds the initial face amount of the policy as long as the insured pays the premiums. 3. The policy shall reflect the investment experience of one or more separate accounts that are established and maintained by the insurer. The insurer shall demonstrate that the reflection of investment experience in the variable life insurance policy is actuarially sound. 4. Each variable life insurance policy shall be credited with the full amount of the net investment return that is applied to the benefit base. 5. At least annually the insurer shall determine any changes in the variable death benefits of each variable life insurance policy. 6. At least monthly the insurer shall determine the cash value of each variable life insurance policy. The method of computation of cash values and other nonforfeiture benefits shall be in accordance with actuarial procedures that recognize the variable nature of the policy. If the net investment return that is credited to the policy at all times from the date of issue is equal to the assumed investment rate with premiums and benefits determined accordingly under the terms of the policy, the resulting cash values shall not be less than the minimum values that are required by section 20-1231 for a general account policy with these premiums and benefits. The assumed investment rate shall not exceed the maximum interest rate permitted under section 20-1231. If the policy does not contain an assumed investment rate the method of computation shall be based on the maximum interest rate permitted under section 20-1231. The method of computation may disregard incidental minimum guarantees as to the dollar amounts payable. For the purposes of this paragraph incidental minimum guarantees include a guarantee that the amount payable at death or maturity shall equal or exceed the amount that otherwise would have been payable if the net investment return credited to the policy at all times from the date of issue had been equal to the assumed investment rate. C. The insurer may base the computation of values that are required for each variable life insurance policy on any reasonable and necessary approximations that the director accepts. D. Each variable life insurance policy that is filed for approval in this state shall contain at least the following: 1. The cover page or a page that corresponds to the cover page of each policy that: (a) Prominently states in either a contrasting color or bold-faced type that the amount or duration of the death benefit may be variable or fixed under specified conditions. (b) Prominently states in either a contrasting color or bold-faced type that cash values may increase or decrease according to the experience of the separate account, subject to any specified minimum guarantees. (c) Describes any minimum death benefit that is required pursuant to subsection B, paragraph 2 of this section. (d) Describes the method or refers to the policy provision that describes the method for determining the amount of insurance payable at death. (e) Informs the policyholder that the policyholder may return the variable life insurance policy within ten days after receiving the policy and receive a refund that equals the sum of: (i) The difference between the premiums paid and the amounts allocated to any separate accounts under the policy. (ii) The value of the amounts that are allocated to any separate accounts under the policy on the date the returned policy is received by the insurer or the insurer's insurance producer. (f) Identifies the owner of the contract. (g) Includes items that are required for fixed benefit life insurance policies and that are not inconsistent with this article. 2. For scheduled premium policies, a grace period provision of not less than thirty-one days from the premium due date. The grace period shall provide that if the premium is paid within the grace period, the policy values will be the same as if the premium had been paid on or before the due date, except for the deduction of any overdue premium. 3. For flexible premium policies, a grace period provision that begins on the policy processing day on which the total charges that are authorized by the policy and that are necessary to keep the policy in force until the next policy processing day exceed the amounts available under the policy to pay the charges according to the terms of the policy. The grace period shall end on a date not less than sixty-one days after the report to policyholders is mailed pursuant to section 20-2609, paragraph 1. The death benefit that is payable during the grace period shall equal the death benefit that was in effect immediately before the grace period less any overdue charges. If the policy processing days occur monthly, the insurer may require the payment of not more than three times the charges that were due on the policy processing day on which the amounts available under the policy were insufficient to pay all of the charges that are authorized by the policy and that are necessary to keep the policy in force until the next policy processing day. 4. For scheduled premium policies, a reinstatement provision that states that the policy shall be reinstated at any time within two years from the date of default on the occurrence of all of the following: (a) The written application of the insured and on the presentation of evidence of insurability, including good health, that is satisfactory to the insurer, unless the cash surrender value has been paid or the period of extended insurance has expired. (b) The payment of any outstanding indebtedness that arose after the end of the grace period following the date of default together with accrued interest on the indebtedness to the date of reinstatement. (c) Payment of an amount not exceeding the greater of: (i) All overdue premiums with interest at a rate of not more than six per cent per annum compounded annually and any indebtedness in effect at the end of the grace period following the date of default with interest at a rate of not more than six per cent per annum compounded annually. (ii) One hundred ten per cent of the increase in cash value resulting from reinstatement plus all overdue premiums for incidental insurance benefits with interest at a rate of not more than six per cent per annum compounded annually. 5. A full description of the benefit base, the method of calculation and the application of any factors that are used to adjust variable benefits under the policy. 6. A provision that designates the separate account to be used and that states both of the following: (a) The assets of the separate account are available to cover the liabilities of the insurer's general account only to the extent that the assets of the separate account exceed the liabilities of the separate account arising under the variable life insurance policies supported by the separate account. (b) The assets of the separate account will be valued monthly or more frequently if any policy benefits vary. 7. A provision that specifies what documents constitute the entire insurance contract. 8. The names of the officers who are empowered to make an agreement or representation on behalf of the insurer. 9. The conditions or requirements for the designation or change of designation of a beneficiary and for the disbursement of benefits if a beneficiary is not designated. 10. The conditions of or requirements for the assignment of the policy. 11. A description of policy value adjustments that will be made if the insured misstates the insured's age or sex. 12. A provision that after a policy has been in force for two years the insurer may not contest the policy during the lifetime of the insured. If an increase in the amount of the policy's death benefits occurs after the policy issue date, if the owner applied for or requested the increase and if the increase was subject to satisfactory proof of the insured's insurability, after the increase has been in force for two years, the insurer may not contest the increase during the lifetime of the insured. 13. A statement that the investment policy of the separate account shall not be changed without the approval of the insurance regulatory authority of the insurer's state of domicile and that the approval is on file with the director. 14. A provision that except if variable death benefits are used to pay premiums the payment of variable death benefits in excess of any minimum death benefits, cash values, policy loans or partial withdrawals or the payment of variable death benefits in excess of any partial surrenders may be deferred either: (a) For up to six months from the date of the request, if the payments are based on policy values that do not depend on the investment performance of the separate account. (b) For any period during which the New York stock exchange is closed for trading, except for normal holiday closing, or for any period during which the securities and exchange commission determines that a state of emergency exists. 15. If settlement options are provided, that at least one option is provided on a fixed basis only. 16. A description of the basis for computing the cash value and the surrender value under the policy. 17. A statement of the premiums or other charges for incidental insurance benefits. 18. Any other items that are currently required for fixed benefit life insurance policies and that are not inconsistent with this article. 19. A provision for nonforfeiture insurance benefits. The insurer may establish a reasonable minimum cash value below which any nonforfeiture insurance options will not be available. 20. That statements that are made by the insured or on behalf of the insured are representations and not warranties. E. Except for term insurance policies and pure endowment policies that are delivered or issued for delivery in this state, each variable life insurance policy shall contain loan provisions for policies that have been in force for two full years that are not less favorable to the policyholder than the following: 1. At least seventy-five per cent of the policy's cash surrender value may be borrowed. 2. The amount borrowed bears interest at a rate that does not exceed the rate permitted by this title. 3. Any indebtedness shall be deducted from the proceeds payable on death. 4. Any indebtedness shall be deducted from the cash surrender value on surrender or in determining any nonforfeiture benefit. 5. For scheduled premium policies, if the indebtedness exceeds the cash surrender value, the insurer shall give notice of its intent to cancel the policy if the excess indebtedness is not repaid within thirty-one days after the date on which the notice was mailed. For flexible premium policies, if the total charges that are authorized by the policy and that are necessary to keep the policy in force until the next following policy processing day exceed the amounts available under the policy to pay the charges, the insurer must send the policyholder a report containing the information specified by section 20-2609, paragraph 3. F. The policy may provide that, as long as the premiums are paid, if, at any time, the variable death benefit is less than it would have been if a loan or withdrawal had not been made, the policyholder may increase the variable death benefit up to the amount it would have been if a loan or withdrawal had not been made. The insured may increase the variable death benefit by paying an amount that does not exceed one hundred ten per cent of the corresponding increase in cash value and by furnishing any evidence of insurability that the insurer requests. G. The policy may specify a reasonable minimum amount that may be borrowed at any time. The minimum does not apply to any automatic premium loan provision. H. If the policy is under an extended insurance nonforfeiture option, a policy loan provision is not required. I. Variable life insurance policyholders who exercise their rights under policy loan provisions shall not be disadvantaged by the exercise of those rights. J. On the exercise of any policy loan provision, the amounts paid to the policyholder shall be withdrawn from the separate account and shall be returned to the separate account on repayment, except that a stock insurer may provide the amounts for policy loans from the general account. K. A variable life insurance policy or related form that is delivered or issued for delivery in this state may: 1. Include an exclusion for suicide that occurs within two years of the issue date of the policy. If the owner applies for an increase in death benefits after the policy issue date, the policy may provide an exclusion for suicide that occurs within two years of any increase in death benefits to the extent of the increased death benefits only. 2. Offer incidental insurance benefits on a fixed or variable basis. 3. Offer to pay dividend amounts in cash. In addition, the policies may offer the following dividend options: (a) The amount of the dividend may be credited against premium payments. (b) The amount of the dividend may be applied to provide amounts of additional fixed or variable benefit life insurance. (c) The amount of the dividend may be deposited in the general account at a specified minimum rate of interest. (d) The amount of the dividend may be applied to provide paid-up amounts of fixed benefit one year term insurance. (e) The amount of the dividend may be deposited as a variable deposit in a separate account. 4. Allow the policyholder to elect in writing an automatic premium loan on a basis that is not less favorable than that required of policy loans under subsection E of this section. The policy may impose a restriction that no more than two consecutive premiums can be paid under the requirements of this paragraph. 5. Allow the policyholder to make partial withdrawals. 6. Include any other policy provision that the director approves. 20-2605. Reserve liabilities for variable life insurance A. Reserve liabilities for variable life insurance policies shall be established under section 20-510 according to actuarial procedures that recognize the variable nature of the benefits provided and any mortality guarantees. B. Reserve liabilities for the guaranteed minimum death benefit shall be the reserve amount that is needed to provide for the contingency of death occurring when the guaranteed minimum death benefit exceeds the death benefit that would otherwise be paid in the absence of the guarantee. The insurer shall maintain reserve liabilities in the general account. Reserve liabilities shall not be less than the greater of any of the following minimum reserves: 1. Assuming an immediate one-third depreciation in the current value of the assets in the separate account followed by a net investment return equal to the assumed investment rate, the aggregate total of the term costs on each variable life insurance contract, if any, covering either: (a) A period of one full year from the valuation date. (b) If less than the amount under subdivision (a) of this paragraph, the period that is provided for in the guarantee and that is not otherwise provided for by the reserves held in the separate account. 2. The aggregate total of the attained age level reserves on each variable life insurance contract. The attained age level reserve on each variable life insurance contract shall not be less than zero and shall equal the residue of the prior year's attained age level reserve on the contract. Any residue shall be increased or decreased by a payment that is computed on an attained age basis pursuant to subdivision (b) of this paragraph. For the purposes of this paragraph: (a) The residue of the prior year's attained age level reserve on each variable life insurance contract shall not be less than zero and shall be determined by adding interest at the valuation interest rate to the prior year's reserve, by deducting the tabular claims based on any excess, if any, of the guaranteed minimum death benefit over the death benefit that would be payable in the absence of the guarantee and by dividing the net result by the tabular probability of survival. The excess shall be based on the actual level of death benefits that would have been in effect during the preceding year in the absence of the guarantee and shall take account of the reserve assumptions regarding the distribution of death claim payments over the year. (b) The payment shall be computed so that the present value of a level payment of that amount each year over the future period for which charges for this risk will be collected under the contract or if no future charges for this risk will be collected under the contract, the payment shall equal (A) minus (B) minus (C). For the purposes of this subdivision: (i) (A) means the present value of the future guaranteed minimum death benefits. (ii) (B) means the present value of the future death benefits that would be payable in the absence of the guarantee and that is computed by assuming a net investment return of the separate account that may differ from the assumed investment rate or the valuation interest rate, or both, but that may not exceed the maximum interest rate that is permitted for the valuation of life contracts. (iii) (C) means any residue as prescribed by subdivision (a) of this paragraph of the prior year's attained age level reserve on the variable life insurance contract. 3. The valuation interest rate and mortality table that are used to compute the guaranteed minimum death benefit and the future death benefit that would be payable in the absence of the guarantee shall conform to permissible standards for the valuation of life insurance contracts. In determining the minimum reserves, the insurer may employ suitable approximations and estimates, including groupings and averages. C. According to the actuarial procedures appropriate to the benefit, the insurer shall maintain reserve liabilities for all fixed incidental insurance benefits and any guarantees that are associated with variable accidental insurance benefits in the general account and shall maintain reserve liabilities for all variable aspects of the variable incidental insurance benefits in a separate account. 20-2606. Separate accounts A. A domestic insurer issuing variable life insurance contracts shall establish one or more separate accounts pursuant to section 20-651. The following apply to the establishment of separate accounts: 1. If no law governs the custody of separate account assets and if the insurer is not the custodian of the separate account assets, all contracts for the custody of the assets shall be in writing and the director may review and approve both the terms of a contract and the proposed custodian before the transfer of custody. 2. Without the director's prior written approval, the insurer shall not employ any person in connection with the handling of separate account assets who within the last ten years either: (a) Was convicted of a felony or a misdemeanor offense involving embezzlement, fraudulent conversion, the misappropriation of funds or securities or a violation of 18 United States Code section 1341, 1342 or 1343. (b) Was found to have violated or has acknowledged violating any law involving fraud, deceit or knowing misrepresentation. 3. All persons who have access to the cash, securities or other assets of any separate account established pursuant to this chapter shall be under bond in an amount of not less than the following amounts based on the combined assets of the insurer's separate accounts: Combined assets Minimum amount of bond Equal to or more than: But less than: $ 0 $ 100,000 $10,000 100,000 600,000 $10,000 plus 4% of assets over $100,000 600,000 1,200,000 $30,000 plus 3 1/3% of assets over $600,000 1,200,000 3,200,000 $50,000 plus 2 1/2% of assets over $1,200,000 3,200,000 4,450,000 $100,000 plus 2% of assets over $3,200,000 4,450,000 6,450,000 $125,000 plus 1 1/4% of assets over $4,450,000 6,450,000 90,450,000 $150,000 plus 5/8% of assets over $6,450,000 90,450,000 350,450,000 $675,000 plus 3/8% of assets over $90,450,000 350,450,000 1,070,450,000 $1,650,000 plus 3/16% of assets over $350,450,000 1,070,450,000 $3,000,000 plus 3/32% of assets over $1,070,450,000 until the total of the bonds equals $5,000,000 4. The insurer shall value the assets of the separate accounts at least monthly. B. The insurer shall maintain in each separate account assets with a value that is at least equal to the greater of the valuation reserves for the variable portion of the variable life insurance policies or the benefit base for the variable life insurance policies. C. The following apply to investments by the separate account: 1. An insurer or any of its affiliates may not make any sale, exchange or other transfer of assets between any of its separate accounts or between any other investment account and one or more of its separate accounts unless both: (a) If assets are transferred into a separate account, the transfer is made solely to establish the account or to support the operation of the policies with respect to the separate account to which the transfer is made. (b) The transfer, whether into or from a separate account, is made by a transfer of cash. The director may approve the transfer of other assets in advance of the transfer. 2. The separate account shall have sufficient net investment income and readily marketable assets to meet anticipated withdrawals under the policies that are funded by the account. D. Except for securities issued or guaranteed as to principal and interest by the United States, a separate account shall not purchase or otherwise acquire the securities of any issuer if immediately after the purchase or acquisition the value of the investment, together with any prior investments of the account in the security that is valued pursuant to this article, exceeds ten per cent of the value of the assets of the separate account. The director may waive this limitation in writing if the director believes that the waiver will not render the operation of the separate account hazardous to the public or to the policyholders in this state. E. A separate account shall not purchase or otherwise acquire the voting securities of any issuer if as a result of the purchase or acquisition the insurer and its aggregated separate accounts will own more than ten per cent of the issuer's total issued and outstanding voting securities. The director may waive this limitation in writing if the director believes that the waiver will not render the operation of the separate account hazardous to the public or to the policyholders in this state or jeopardize the independent operation of the issuer of the securities. F. The ten per cent limitation under subsection D of this section does not preclude the investment of separate account assets in shares of investment companies that are registered pursuant to the investment company act of 1940 (15 United States Code sections 80a-1 through 80a-64) or in other pools of investment assets if the investments and investment policies of the investment companies or asset pools comply substantially with subsection C of this section and with any other applicable provisions under this article. G. The insurer shall value investments of the separate account at their market value on the date of valuation or at amortized cost if it approximates market value. H. A domestic insurer shall not change its investment policy of a separate account without first filing the change with the director. A change that is filed pursuant to this subsection is effective sixty days after the date on which it was filed with the director, unless the director notifies the insurer before the end of the sixty day period of the director's disapproval of the proposed change. At any time, after notice and a public hearing, the director may disapprove any change that has become effective. The director may disapprove the change if the director determines that the change would be detrimental to the interests of the policyholders who participate in the separate accounts. I. Before or contemporaneously with the delivery of the policy, the insurer shall disclose to the insured in writing all charges that may be made against the separate account, including the following: 1. Taxes or reserves for taxes that are attributable to investment gains and income of the separate account. 2. Actual cost of reasonable brokerage fees and similar direct acquisition and sale costs that are incurred in the purchase or sale of separate account assets. 3. Actuarially determined tabular costs of insurance and the release of separate account liabilities. 4. Charges for administrative expenses and investment management expenses, including internal costs that are attributable to the investment management of assets of the separate account. 5. A charge for mortality and expense guarantees at a rate specified in the policy. 6. Any amounts in excess of the amounts that are required to be held in the separate accounts. 7. Charges for incidental insurance benefits. J. The board of directors of each insurer that seeks approval to enter into the variable life insurance business in this state shall adopt written standards of conduct relating to the purchase or sale of investments of separate accounts. The standards of conduct are binding on the insurer and its officers, directors, employees and affiliates. The adoption of a code of ethics that meets the requirements of section 17j of the investment company act of 1940 satisfies this section. K. A law that applies to the officers and directors of insurance companies with respect to conflicts of interest also applies to the members of a committee or any other similar body of a separate account. L. An insurer shall not enter into a contract under which a person for a fee undertakes to regularly furnish investment advice to the insurer with respect to its separate accounts that are maintained for variable life insurance policies unless the contract is in writing, the contract states that the insurer may terminate the contract without penalty to the insurer or the separate account on sixty days' written notice to the investment advisor and one of the following applies: 1. The person who provides the advice is registered as an investment adviser under the investment advisers act of 1940 (15 United States Code sections 80b-1 through 80b-21). 2. The person who provides the advice is an investment manager under the employee retirement income security act of 1974 (29 United States Code sections 1001 through 1461) with respect to the assets of each employee benefit plan that are allocated to the separate account. 3. The insurer has filed with the director and continues to file annually the following information and statements concerning the proposed advisor: (a) The name and form of the organization, the state of organization and the proposed advisor's principal place of business. (b) The names and addresses of the proposed advisor's partners, officers and directors and of persons who perform similar functions if the investment advisor is an individual. (c) A written standard of conduct that complies in substance with subsection J of this section. (d) A statement that is submitted by the proposed advisor to the insurer and that states with respect to each of the following that the proposed advisor or a person associated with the proposed advisor has not: (i) Within the last ten years been convicted of a felony or misdemeanor offense arising out of such person's conduct as an employee, salesman, officer or director of an insurance company, a banker, an insurance producer, a securities broker or an investment advisor involving embezzlement, fraudulent conversion, the misappropriation of funds or securities or a violation of 18 United States Code section 1341, 1342 or 1343, and arising out of the person's conduct as an employee, salesperson, officer or director of an insurance company or as a banker, insurance producer, securities broker or investment advisor. (ii) Been permanently or temporarily enjoined by a court order, judgment or decree from acting as an investment advisor, underwriter, broker or dealer, acting as an affiliated person or an employee of an investment company, bank or insurance company or engaging in or continuing any conduct or practice in connection with any enjoined activity. (iii) Been found by a federal or state regulatory authority to have wilfully violated or acknowledged a wilful violation of a federal or state securities law or the insurance laws of this state. (iv) Been censured, been denied an investment advisor registration, had a registration as an investment advisor revoked or suspended or been barred or suspended from associating with an investment advisor by a federal or state regulatory authority. M. After notice and an opportunity for a hearing, the director may require that the investment advisory contract be terminated if the director deems that continued operation under the contract would be hazardous to the public or the insurer's policyholders. 20-2607. Information to applicants A. An insurer that delivers or issues for delivery in this state a variable life insurance policy shall deliver the following information to the applicant for the policy: 1. A summary explanation of the principal features of the policy. The summary explanation shall be in nontechnical terms and shall include a description of the manner in which the variable benefits will reflect the investment experience of the separate account and the factors that affect the variation. The explanation shall include notice of the requirements of section 20-2604, subsection D, paragraph 1, subdivision (e) and paragraph 7. 2. A statement of the investment policy of the separate account, including a description of both: (a) The investment objectives of the separate account and the principal types of investments that will be made. (b) The restrictions or limitations on the manner in which the operations of the separate account will be conducted. 3. A statement of the net investment return of the separate account for each of the last ten years, or if the separate account has been in existence for less than ten years, a statement of the net investment return of the separate account for each of the years that the separate account has been in existence. 4. A statement of the charges that were levied against the separate account during the previous year. 5. A summary of the method the insurer will use in valuing the assets that are held by the separate account. 6. A summary of the federal income tax aspects of the policy that apply to the insured, the policyholder and the beneficiary. 7. Illustrations of benefits that are payable under the variable life insurance contract. The insurer shall prepare the illustrations. The illustrations shall not include projections of past investment experience into the future or attempted predictions of future investment experience. This paragraph does not prohibit the use of hypothetical assumed rates of return to illustrate possible levels of benefits if the illustration makes it clear that the assumed rates are hypothetical only. B. This section is satisfied if a disclosure that contains the information required by this section is delivered to the applicant. The disclosure shall either: 1. Be a prospectus that satisfies the requirements of the securities act of 1933 (15 United States Code sections 77a through 77aa) and that the securities and exchange commission declares effective. 2. Contain the information and reports that are required by the employee retirement income security act of 1974 (29 United States Code sections 1001 through 1461) if the policies are exempt from the registration requirements of the securities act of 1933. 20-2608. Variable life insurance policy application requirements A variable life insurance policy application shall contain all of the following: 1. A prominent statement that the death benefit may be variable or fixed under specified conditions. 2. A prominent statement that cash values may increase or decrease according to the investment experience of the separate account. 3. Questions that enable the insurer to determine the suitability of variable life insurance for the applicant. 20-2609. Policyholder reports An insurer that delivers or issues for delivery in this state a variable life insurance policy shall send the following reports to each variable life insurance policyholder: 1. Within thirty days after each anniversary of the policy, a statement or statements of the cash surrender value, the death benefit, any partial withdrawal or policy loan, any interest charge and any optional payments that are allowed under the policy and that are computed as of the policy anniversary date. The statement may be furnished within thirty days after a specified date in each policy year if the information contained in the statement is computed not more than sixty days before the notice is sent. This statement shall state that the cash values and the variable death benefit may increase or decrease according to the investment experience of the separate account and shall prominently identify any value that the statement describes and that may be recomputed before the next statement required by this section. If the policy guarantees that the variable death benefit on the next policy anniversary date will not be less than the variable death benefit specified in the statement, the statement shall be modified to indicate this policy guarantee. In addition, the report must show the projected cash value and cash surrender value, if different, as of one year from the end of the period covered by the report. In determining the projected value, the insurer shall assume that the planned periodic premiums, if any, are paid as scheduled, that the guaranteed costs of insurance are deducted and that the net return is equal to the guaranteed rate, or if there is no guaranteed rate, is not greater than zero. If the projected value is less than zero, the statement shall include a warning message that the policy may be in danger of terminating without value in the next twelve months unless additional premium is paid. For flexible premium policies, the report shall contain a reconciliation of the change since the previous report in cash value and cash surrender value, if different, because of payments made, less deductions for expense charges, withdrawals, investment experience, insurance charges and any other charges made against the cash value. 2. An annual statement or statements, including: (a) A summary of the financial statement of the separate account that is based on the annual statement last filed with the director. (b) The net investment return of the separate account for the last year and, for each year after the first, a comparison of the investment rate of the separate account during the last year with the investment rate during prior years, up to a total of not less than five years if available. (c) A list of investments that are held by the separate account as of a date not earlier than the end of the last year for which an annual statement was filed with the director. (d) Any charges that were levied against the separate account during the previous year. (e) A statement of any change in the investment objective and orientation of the separate account, in any investment restriction or material quantitative or qualitative investment requirement that applies to the separate account or in the investment advisor of the separate account. 3. For flexible premium policies, if the amounts that are available under the policy on any policy processing day to pay the charges that are authorized by the policy are less than the amount necessary to keep the policy in force until the next following policy processing day, a report that indicates the minimum payment that is required under the terms of the policy to keep the policy in force and the length of the grace period for the payment of that amount. 20-2610. Foreign companies; compliance with laws of domiciliary state If the laws of a foreign company's domiciliary state provide a degree of protection to the policyholders and the public that is substantially similar to the degree of protection that is provided by this article, the director may determine that the foreign company has complied with this article. 20-2631. Definitions In this article, unless the context otherwise requires: 1. "Company" means an insurer licensed pursuant to this title to transact life insurance or annuities in this state. 2. "Variable annuity" means an individual policy or contract that provides for annuity benefits that vary according to the investment experience of a separate account or accounts that the insurer maintains pursuant to section 20-651 or the corresponding insurance laws of a foreign insurer's domiciliary state. 20-2632. Qualifications to issue variable annuities A. A company shall not issue or issue for delivery in this state variable annuities unless the director is satisfied that the company's condition or method of operation in connection with the issuance of variable annuity contracts will not be hazardous to the public or the company's policyholders in this state. The director shall consider the following: 1. The history and financial condition of the company. 2. The character, responsibility and fitness of the company's officers and directors. 3. If the company is a foreign company, the law under which the company is authorized in its domiciliary state to issue variable annuities. B. If the company is a subsidiary of an authorized life insurance company or is affiliated with an authorized life insurance company by common management or ownership, the director may determine that the subsidiary has complied with subsection A, paragraph 2, if either: 1. The authorized life insurance company has satisfied the requirements under subsection A. 2. The authorized life insurance company or the company is authorized to and has a satisfactory record of doing business in this state for at least three years. C. Before a company issues or issues for delivery variable annuities in this state, the company shall submit all of the following to the director: 1. A general description of the kinds of variable annuities the company intends to issue. 2. If requested by the director, a copy of the laws of the company's state of domicile under which the company is authorized to issue variable annuities. 3. If requested by the director, biographical data on the company's officers and directors. The biographical data shall be submitted on the national association of insurance commissioners' biographical data forms. 20-2633. Separate account; annuities A. A domestic company that issues variable annuities shall establish one or more separate accounts pursuant to section 20-651. B. Except pursuant to subsection C of this section: 1. The company may invest and reinvest amounts that are allocated to a separate account and accumulations on the allocated amounts without regard to any requirements or limitations that are prescribed by the laws of this state governing the investments of life insurance companies. 2. The company shall not consider the investments in the separate account or accounts in applying the investment limitations that otherwise apply to the investments of the company. C. The company may retain its reserves for benefits that are guaranteed as to the dollar amount and duration and for funds that are guaranteed as to the principal amount or stated rate of interest in a separate account if a portion of the assets of the separate account in an amount that is at least equal to the reserve liability is invested according to the laws of this state governing the investments of life insurance companies. The company shall not consider the portion of the assets in applying the investment limitations that otherwise apply to the investments of the company. D. With respect to seventy-five per cent of the market value of the total assets in a separate account, a company shall not, unless otherwise approved by the director on a showing that the approval will not be hazardous to the public or policyholders in this state, purchase or otherwise acquire the securities of any issuer, other than securities that are issued or guaranteed as to principal or interest by the United States, if immediately after the purchase or acquisition the market value of the investment, together with prior investments of the separate account in the security taken at market, would exceed ten per cent of the market value of the assets of the separate account. E. Unless otherwise permitted by law or approved by the director, a company shall not purchase or otherwise acquire for its separate accounts the voting securities of any issuer if as a result of the acquisition the insurance company and its separate accounts, in the aggregate, will own more than ten per cent of the total issued and outstanding voting securities of the issuer. This limitation does not apply to securities that are held in separate accounts, the voting rights in which are exercisable only according to instructions from those persons who have an interest in the accounts. F. The limitations under subsections D and E of this section do not apply to the investment with respect to a separate account in the securities of an investment company that is registered under the investment company act of 1940 (15 United States Code sections 80a-1 through 80a-64) if the investments of the investment company substantially comply with subsections D and E of this section. G. Unless the director otherwise approves, assets that are allocated to a separate account shall be valued at their market value on the date of valuation. If there is no readily available market, the assets shall be valued under the terms of the contract or the rules or other written agreement that applies to the separate account. Unless the director otherwise approves, the portion, if any, of the assets of the separate account that is equal to the company's reserve liability with regard to the benefits and funds under subsection C of this section shall be valued according to the rules that otherwise apply to the company's assets. H. Except as provided under the applicable contracts, that portion of the assets of any separate account that is equal to the reserves and other contract liabilities with respect to the account shall not be charged with liabilities arising out of any other business the company may conduct. I. Notwithstanding any law to the contrary, a company may either: 1. With respect to a separate account that is registered with the securities and exchange commission as a unit investment trust, exercise voting rights in connection with any securities of a regulated investment company registered under the investment company act of 1940 and held in the separate accounts according to instructions from those persons who have an interest in the accounts ratably as determined by the company. 2. With respect to a separate account that is registered with the securities and exchange commission as a management investment company, establish for the account a committee, a board or any other body. The members of the committee, board or other body may or may not be affiliated with the company and may be elected to the membership by the vote of those persons who have an interest in the accounts ratably as determined by the company. This committee, board or other body, alone or in conjunction with others, may manage the separate account and the investment of its assets. Subject to approval of the director on a showing that the approval will not be hazardous to the public or policyholders of this state any company, committee, board or other body may make such other provisions in respect to any such separate account as may be deemed appropriate to facilitate compliance with the requirements of any federal or state law. J. A company may not sell, exchange or otherwise transfer assets between any of its separate accounts or between any other investment account and one or more of its separate accounts unless either: 1. The director approves the sale, transfer or exchange based on a showing that the sale, transfer or exchange is equitable to current policyholders. 2. Both of the following occur: (a) If the transfer is into a separate account, the transfer is made solely to establish the account or to support the operation of the contracts with respect to the separate account to which the transfer is made. (b) If the transfer is into or from a separate account, the transfer is made either: (i) By a transfer of cash. (ii) By a transfer of securities having a valuation that can be readily determined in the marketplace, if the director approves the transfer of the securities. K. Except as otherwise approved by the director, the company shall maintain in each separate account assets with a value in an amount that is at least equal to the reserves and other contract liabilities with respect to the account. L. Any law that relates to conflicts of interest and that applies to the officers and directors of insurance companies also applies to the members of any separate accounts committee, board or other body that is established pursuant to subsection I of this section. An officer or director of the company or a member of the committee, board or body of a separate account shall not receive, directly or indirectly, any commission or other compensation with respect to the purchase or sale of any assets of the separate account. 20-2634. Filing of contracts; approval Unless exempt pursuant to chapter 5, article 1 of this title, each insurer shall file with the director all variable annuity contracts and all riders, endorsements, applications and other documents that are attached to and made part of the contract and that relate to the variable nature of the contract. The director shall approve all variable annuity contracts before they are delivered or issued for delivery in this state. 20-2635. Variable annuity contracts A. A variable annuity that provides benefits payable in variable amounts and that is delivered or issued for delivery in this state shall contain a statement of the essential features of the procedures the insurance company must follow in determining the dollar amount of the variable benefits. The contract, including a group contract and any certificate in evidence of variable benefits that is issued under the contract, shall state that the dollar amount will vary to reflect investment experience and shall contain on its first page a clear statement that the benefits under the contract are on a variable basis. B. Illustrations of benefits that are payable under a variable annuity shall not include projections of past investment experience into the future or attempted predictions of future investment experience. This subsection does not prohibit the use of hypothetical assumed rates of return to illustrate possible benefit levels. C. An insurer shall not deliver or issue for delivery in this state an individual variable annuity contract that calls for the payment of periodic stipulated payments unless the contract contains in substance the following provision or provisions: 1. A grace period provision of thirty days or of one month, within which any stipulated payment to the insurer that falls due after the first day may be made and during which the contract shall continue in force. The contract may state the basis for determining the date as of which any payment that is received during the grace period shall be applied to produce the values under the contract arising from the contract. 2. A reinstatement provision that u